Equity Linked Saving Scheme (ELSS) â€“ Features of ELSS, Taxation

Updated on
Oct 05,2018 - 05:29:18 AM

Equity Linked Saving Scheme (ELSS):An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that invests the majority of funds in equity and enjoys the benefit of tax exemption under the section 80 C of the Income Tax Act. ELSS has a lock-in period of three years from the date of investment which means that each of the investment made gets locked for three years and the investor cannot withdraw anything before the maturity of the mutual fund (3 years). To qualify as ELSS, minimum 65% of the fund amount need to be invested in equities and related products.

Features of ELSS:

1. Taxation:

Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. ELSS is one of such investments that qualify for deductions from taxable income under 80C up to Rs 1, 50,000. The returns generated by way of dividend are tax free in the hands of investor. They are also not subjected to Dividend Distribution Tax. Long term capital gains arising out of investments in ELSS are also tax free.

2. Shortest lock-in period among tax saving investments:

There are several tax saving schemed out in the market such as investments in PPF, EPF, Fixed deposits (FD), National pension scheme(NPS), National savings certificate (NSC), Sukanya Samriddhi Yojana (SSY) and Senior Citizens Savings Scheme (SCSS) etc., Out of all of these ELSS enjoys the shortest lock-in period making it more attractive to invest.

Lock in periods of various tax saving investment schemes:

Investment

PPF

NPS

NSC

ELSS

FD

SSY

SCSS

Lock-in (in years)

15

Till retirement

5

3

5

21

5

3. Variety of options:

While investing in ELSS, there are 3 options available to the investor. They are

Growth option:No dividend is paid till the maturity. Instead, holder will only receive the benefits at the end of the maturity

Dividend Option:Under this option, the investor gets the regular dividend income every time declared by the fund.

Dividend Reinvestments option:Dividend is declared by the fund but the same will be re-invested into the fund by adding to the NAV.

4. High potential of return:

Though the investment in equity is highly risky, it carries a high earning potential at the same time. They have the best earning potential among all the tax saving schemes available out there. Following is the historical performance of certain ELSS schemes as at July 2017.

Scheme name

Return (%)

1 year

3 years

5 years

Axis Long term equity fund

17.2

15.56

23

Birla Sun life tax relief 96

21.75

18.11

22.14

Franklin India tax shield

14.47

15.48

19

5. Can be invested through SIP:

Investment in SIP can be made by way of Systematic Investment plan (SIP) where a fixed amount is monthly deducted from your bank account and invested in the fund you have chosen. This option makes the ELSS accessible to small and medium investors who cannot put a lump sum in the investment.

6. No upper limit:

Starting with a minimum investment of Rs 500, one can invest as much as one wants. However the tax benefit under 80c is limited only till Rs. 1.5 lakhs.